Capital without Borders: Wealth Managers and the One Percent

Brooke Harrington peels back the layers of high net-worth Individuals and wealth managers to expose economic inequality—politely.

For this review of Capital Without Borders, the reviewer has decided to try something different, presenting the review in the form of a Q & A.

Note: The term “high-net-worth individual” and “high-net-worth individual and family” are used frequently in this review. This reviewer shortens the phrase to HNWI and HNWIAF.

Q: What is wealth management?

A: Author and Sociologist Brooke Harrington’s introduction to Capital Without Borders lays out Capital Without Borders’ premise, foundation and methodology. Capital Without Borders is an ethnographic study—Harrington intentionally chose to not follow the paper trail because she considered documents to be misleading. She defines wealth management as the business of “deploying legal and financial expertise to defend the fortunes of high-net-worth individuals and families.”

Q: How wealthy do you have to be to hire a wealth manager?

A: One might guess having $5M on hand would be the minimum, as this is the amount needed before being allowed to buy into a hedge fund, though Harrington identifies a class of ultra-HNWIs who have a minimum of $30M in investable assets. To provide context, $30M is the wealth equivalence of a small country. For the “one percent” in the U.S. a full 75 percent of their wealth comes from stocks, bonds, real estate, and earnings.

Q: How did Brooke Harrington prepare for writing Capital Without Borders?

A: Harrington tells readers, “The wealthy are powerful and notoriously difficult to study.” As part of her preparation she went through a full wealth-management training course to become certified in wealth management. Being certified gave her an in to access. Harrington also delayed publication to avoid being denied entry to OFCs, countries known for offshore banking. Her concern was real—a Newsweek investigative reporter had previously been prevented from entering the Isle of Man.

Q: How did her interviews with wealth managers go?

Harrington was certified in wealth management so she did not need to go “undercover.” She used her real name and institutional affiliation, and questions about her purpose and academic position proved to be useful icebreakers. Though she believed herself to be a non-threatening listener, one interviewee threatened her.

Q: Does Brooke Harrington “name and shame”?

A: Harrington does name and shame, but only a select few, and only those who had been previously shamed publically.

Q: Getting back to HNWIAFs, just who are these people?

A: HNWIAFs as a group have more in common with each other socially and politically than with citizens of their own countries. Harrington provides an example of a HNWI: The Brazilian who considers Canada his home, oversees a trust in the Cayman Islands of holding companies in Latin America that were incorporated in Bermuda, along with an International Business Corporations (IBC) incorporated in the British Virgin Islands (BVI), holding a portfolio of stocks and bonds whose beneficiaries reside throughout Europe and South America.

Q: Where does HNWIAFs’ wealth come from?

A: Historically from the Middle Ages wealth has come from land ownership. Due to global trade, family wealth has grown to include cash, oil, furs, textiles, stocks, bonds, and industry. With this growth, management of wealth has become more complicated, and the nature of wealth has changed from land to trusts and trusteeships.

Q: Is there a downside to being wealthy?

A: Harrington writes, “Wealth makes high-net-worth individuals a target of threats.” In her interviews of wealth managers, a few of their clients are described as paranoid, for example one HNWI refused to meet with his wealth manager in public. Wealth managers have been known to transport suitcases of cash on private planes—though laws have recently changed to make large cash transfers more difficult.

Q: What is trusteeship?

A: Wealth management was first performed by amateurs who were called “trustees.” The first trustees were family and friends who became protectors of family wealth from the state’s inheritance taxes. Originally the duty of trustee was so strict that trustees were prohibited from being paid—a formidable (and intentional) barrier to professionalism. The laws on trusteeship in the U.S. and U.K. progressed differently over the years but to the same end. The U.S. Supreme Court recognized trustees as a professional class in the 19th century. Trustees did not have much power or freedom in the U.K. until 1899, and then only in a limited fashion. Early on, trustees were liable for losses in the stock market—a liability pretty limited what trustees could do. But the laws on wealth management evolved alongside capitalism, providing greater freedom to act from the 1960s through the 1980s.

Q: How is wealth management different from investing?

A: Wealth management has a “defensive orientation.” Rather than seeking growth and profit wealth managers function to protect a fortune already gained by staying on the right side of the law. Wealth managers find efficiencies through tax reduction and avoidance of regulation, control of family business, inheritance and succession, investment and charitable giving—staying on the right side of the law has a broad leeway.

Q: Tell me more

A: Wealth managers liken themselves to architects working with legal documents to create complex structures of organizations, corporations, trusts, and foundations. The complexity in wealth management is intentional to escape scrutiny. The purpose is to cause a “My Eyes Glaze Over” (MEGO) reaction from government enforcers. Their domain is the legally proper, but “ethical gray area.”

Their work has been called “professional subversion, “creative compliance,” and “regulatory arbitrage.” Wealth managers find loopholes and regulatory voids, gaps between the laws of different countries.

Q: Is wealth management a professional career?

A: There is a professional body for wealth management, the Society of Trust and Estate Practitioners (STEP) with 20,000 members across 95 countries. Wealth managers have a professional code of ethics and are governed by case law. The wealth manager must look and speak the part, have gone to the right schools, be comfortable with the right recreational activities, sail, shoot, golf, perhaps even enjoy opera, though STEP offers no social training. Wealth managers just starting out tend be hired into firms and the work tends to be 40 hours per week. The pay is comparable to a doctor or lawyer but nowhere near the high-end for finance. When self-employed wealth managers can charge fees to match, called “vanity cost.”

The wealth managers’ relationship with clients is not governed by legal contracts, which are “characterized by high costs of specification and monitoring.” Instead, their relationship is “fiduciary;” the concept of loyalty replaces contracts. Occasionally outlandish and humiliating requests are made to wealth managers by clients; examples provided and attested to by Harrington’s interviewees—though this reviewer considers humiliating requests to be “normal” behavior with HNWIs.

Often wealth managers enter the field from law or accountancy, though the job does not need a college degree. Some have started their careers from having regular contact with HNWIAFs; for example one interviewee was a deck hand on a yacht, another a clerk in a bank, and another a “poor-cousin” member of royalty.

Q: What should wealth managers know of their clients, in general?

A: Wealth managers should be familiar with their client’s culture, language, and religion. Harrington notes that in some religions the very idea wealth management is considered act against God’s wishes, equivalent to taking out insurance against God. In some cultures talking about succession planning is taboo; talking about death invites death. Wealth managers should also be aware that age, gender, and ethnicity can take on an importance greater than technical competence. For reasons such as these, some wealth managers refuse to take on clients of different cultures.

Harrington also identifies two cultural “classes” of HNWIAFs: the old-moneyed class and the new-moneyed class. The old-moneyed class is from Europe, and the new-moneyed class is from Asia. These classes must be treated differently. The old-moneyed class has more experience with trusts and is more comfortable with wealth management. New-moneyed class countries include China, Russia, and countries in the Arabian Peninsula. These countries have been recognized as having “lawless” societies where theft of assets by their government without due process is common. When a potential client is from a lawless society it will be more difficult for a wealth manager to gain their trust;  the new moneyed don’t trust trusts. For the new-money class, investments in foreign real estate is considered safer.

Q: What will a HNWIAF gain by employing a wealth manager?

A: The environment that allows some to “get rich quick” can also make it difficult to hold on to their wealth. This problem has been called “shirtsleeves to shirtsleeves in three generations.” The first generation acquires the wealth, the second generation enjoys the wealth, and the third generation is left with nothing. Wealth managers attempt to consolidate resources over generations to form “dynastic wealth” that lasts across generations.

Q: But isn’t it true you can’t take it with you?

A: Wealth managers can give clients control from beyond the grave. If it is believed that heirs might have too much fun to run the client’s business after the client’s death, the client can designate a trust “protector” to control the business. Called a “purpose trust” or “dynastic trust,” the protector is given broad discretionary power to prevent mismanagement by heirs.

Q: What is the most difficult thing for a HNWI client to consider?

A: Trusteeship protects dynastic wealth from the clients’ and heirs’ impulses and poor judgment. But moving a client’s wealth into a trust moves that wealth outside the client’s direct control. To take this step, matters of trust and confidentiality need to be made clear between the client and the wealth manager. Clients have been known to hide wealth from wealth managers, which can cause problems after the client’s death.

Q: Describe the relationship between wealth manager and client.

A: One of Harrington’s interviewees considers wealth management to be a multipurpose role to advise and protect the wealthy, and this role includes a measure of social work. The wealth manager must provide discretion and loyalty, as for example the HNWI who wants to leave money to his girlfriend but doesn’t want his wife to know. Divorce is such a threat to wealth that it has its own subspecialty in financial advisor services, though in this particular matter case law is still evolving. Other concerns for a wealth managers may include protecting elderly clients from relatives who want to cut corners in medical care, disinheriting family members who have fallen out of favor, and disentangling wealth hidden by untrusting clients.

Q: Does Brooke Harrington provide technical details for wealth management?

A: Yes she does. Harrington describes a variety of trusts and trust regulations. The general approach of wealth management is to apply legal regimes selectively to individual components of wealth. Each component of wealth should be placed in a jurisdiction most favorable to the client, and then dispersed as widely as possible in a structure made as complex as possible, to mask ownership. For example, trusts may be spread across countries to reduce holdings in one country so as to avoid obligations due to creditors in other countries. Wealth management includes using charitable foundations to avoid inheritance tax by paying heirs a salary (from being on the board of the foundation), instead of an inheritance. And by putting wealth into an offshore financial center (OFC) trust, if the client were to go to jail, the money would still be safe.

In an appendix, Harrington compares the relative merits of trusts, foundations, corporations, and offshore corporations. A “layer cake” chart depicts a hierarchy of corporations, foundations, and trusts illustrating how dynastic wealth may be protected by hiding ownership legally through complexity.

Q: Tell me more about OFCs

A: Moving money to an offshore financial center reduces taxes on profits through international law in what is called a DTAA, Double Taxation Avoidance Agreement. Most OFCs are former U.K. island colonies that chose banking as the quickest, easiest way to self-sufficiency. OFC banking islands include BVI, Turks and Caicos, Seychelles, Cook Islands, Antigua, and the Cayman Islands. There are risks to becoming an OFC. Nations that are used as tax havens can acquire what has been called “the financial curse,” that is, becoming economically hollowed out by gentrification (or due to the great disparity in wealth, regification). Harrington claims that Antigua’s governance was bought and paid for by R. Allen Stanford (currently serving a 110-year prison sentence for fraud, a fact that goes unnoticed by Harrington.)

Q: How much money might an OFC handle?

A: Russia channeled $31.7B to the British Virgin Islands (BVI) in the first quarter of 2013. Note that BVI doesn’t even rank in the top 10 of OFCs, and not all OFCs are offshore. Switzerland dominates the field with $8.9B in private wealth, and 11% of private offshore finance passes through the city of London. Ironically the U.K. is believed to lose 100 billion pounds annually by citizen tax dodgers. It may also be interesting to note that the U.S. ranks number three as a foreign tax haven, a fact that also goes unmentioned by Harrington. The problem in the U.S. comes from citizens pretending to be foreigners acting through cutouts to take advantage of tax haven laws.

Q: How much wealth do wealth managers manage, overall?

A: Wealth managers in total direct up to $21 trillion in private wealth, to the consequence of an estimated $200 billion in tax revenue lost each year.

Q: How do OFCs remain legal?

A: Harrington blames it on the 1684 Treaty of Westphalia when it was agreed that any one nation’s laws did not have to follow any other nation’s laws. Wealth managers have never depended on the state for license to practice, and count on nations having complex tax laws and gaps in international laws providing opportunities to create “moveable wealth” for their clients. But in this reviewer’s judgment, it is really greedy banks and nations’ political capture by HNWIAFs.

Note too some gaps in international law can be intentional but have unintended consequences, as for example with “free trade.” Free trade promotes reducing taxes on international trade, which encourages wealth to be moved from nations with higher taxes to nations with lower taxes—inducing a race to the bottom. High tax nations can and do recognize they are being played, and their laws can and do change in response.

For example Jersey, one of the Channel Islands between the U.K. and France and an OFC, will soon have to comply with new EU regulations, and is struggling to cope.  An interested reader should Google “The Fall of Jersey” for more background. Note that Harrington continually hints at things—as if she’s almost afraid to state what she knows about the dark side outright. If a reader were to Google “tax justice network,” that reader would discover Harrington barely scratches the surface.

Q: What are the socially harmful consequences of wealth management?  

A: Harrington claims the democratic process has been compromised by the practices of wealth managers. For example, wealth managers may be asked for their opinion on proposed new laws in nations that support offshore banking. Wealth magnifies the voice of influence on politics and law. The negative influence of HNWIs can be masked through pretense, as for example in the pressure to balance budgets through decreasing the size of government through cutting social services programs funded through taxation. Tax funded healthcare and pensions are services that HNWIAFs will never need. The consequence is an accelerated imbalance between the wealthiest and poorest within a nation.

Q: Whose side is Brooke Harrington on?

A: Well, give her a break, she was threatened. For the most part Harrington appears sympathetic to wealth managers. She is only lightly critical of dynastic wealth though she does quite a bit of dog whistling, and damning with faint praise—Help!’ Her eyelids blink an SOS, “I am being held captive!” In the last chapter however, Harrington breaks free and gets her hate on.

Q: Is it true, as Balzac wrote, there is a great crime behind every great fortune?

A: In the last chapter Harrington aggressively lays out the downside to wealth management—the corruption, the money laundering, and the financial strategies that though legal, are socially destructive. She voices the concerns of economist Thomas Piketty that wealth inequality is growing faster than income inequality. Here Harrington can be seen at her most scornful, equating tax avoidance with theft, calling wealth managers “parasites.” 

Q: What does the future hold for wealth managers?

A: The future looks very bright indeed for wealth managers and their clients. Harrington notes that very little can be done to stop them. “The high-net-worth individuals of the world are largely ungoverned and ungovernable.” Harington says there will always be a market for services for the wealthy, and the wealthy will always be vested in laws that protect their wealth.

Increasing constraints by international law simply leads to continued financial and legal finagling. Loopholes that appear most promising at this moment are the legal structures that show compliance yet remain opaque, “declared but hidden.” Yet another promising loophole is the use of “mediation” to resolve conflict. Mediators can be chosen by the wealthy, while the process itself avoids the transparency that courtrooms reveal.

When wealth managers find themselves under increasing regulation, as for example, proposals to offer financial incentive to comply with tax laws can result in wealth managers all being fired before they can do so, they can turn from personal services to corporate services. As for example with payroll schemes where salaries are paid from (tax dodging) offshore accounts.

What is most enjoyable in Capital without Borders is that Harrington doesn’t just lay out facts and figures; what might have been a dull or a biased polemic becomes a fascinating tale of wealth, power, corruption, and scandal told through a well crafted but imperfect filter of niceness.

Capital Without Borders will be an easy to read for the 99% but might discomfort the 1%, if only a little bit.